For bitcoin to succeed, Mt. Gox had to fail, and government regulation may be a blessing for the digital dinero

InfoWorld|Feb 27, 2014

Bitcoins are back in the news -- at first glance, not in a good way. The latest scandal centers on the Mt. Gox bitcoin exchange, of which Mark Karpele is the currently bullet-sweating CEO. The exchange has suffered a number of minor bumps in recent months, but was forced to close again after admitting it's lost more than 774,000 bitcoins over the last few years. That translates into up to $400 million in Madoff-style meatspace bucks.

Apparently Mt. Gox suffered numerous security breaches, probably from sinister Ukranian hacker syndicates or, alternatively, middle-schoolers bored with Candy Crush Saga. These occurred over a long period of time, however, and the exchange has been operating as though it were fully solvent and operational, happily taking in customer bitcoins, but now unwilling and apparently unable to give them out.

No one, including Mt. Gox or the beleaguered Mr. Karpele, have any idea where the missing bitcoins are, and even if they had suspicions, there's no way to prove it. Meanwhile the bell is tolling for Mt. Gox, and those who were once advocates are falling silent or degenerating into downright bitcoin bashing.

Bye-bye to bitcoin?

Which brings us to the most obvious question: What happens to bitcoins now? Are they doomed to fall on the ash heap of financial history along with the travelers' checks and tasteful displays of wealth?

The scandal has once again proven that bitcoins are about as safe as playing Russian roulette with a two-barrel Derringer or giving Lindsay Lohan the keys to your car. However, it doesn't mean the currency is dead -- but Mt. Gox sure is.

From a mountain to a molehill

Why this grew to be the biggest exchange of a potentially world-changing emerging financial market is a bit of a mystery to me. Apparently, it began as an online venue for fantasy geeks to trade Magic: The Gathering playing cards, hence the name: Magic the Gathering Online Exchange, or Mt. Gox. I think I've been pretty public about my long-term devotion to Dungeons & Dragons; even so, there's no way I'd give my shadily earned shekels to a grinning dungeon master who, by way of his Monster Manual training, decided he's now a banker.

A few die-hard bitcoin advocates are downplaying the scandal, saying that Mt. Gox will suffer only temporary dings to its reputation and be back up and around before we know it. I'm not one of those. Bad reputation is one thing -- this is terminal. Karpele is either hiding from authorities in Eric Edward Snowden's guest room or sitting in a Japanese sake bar, drunk off his keister, and writing his autobiography, tentatively titled "Pointless Meat."

You can stick a fork in Mt. Gox, but unlike the hordes of new bitcoin haters, I think this scandal might actually be a good thing for the currency as a whole. Near as I can tell, bitcoins have thrived on regular kicks in the crotch. When the technology first arrived, crypto nerds loved it, but the financial community thought it was a joke. Time passes and news emerges that the unregulated currency isn't a joke, but has instead become the de facto purchase platform for every criminal from gang bangers to Extenz salesmen. Surprisingly, that spooks some speculators but actually attracts others.